Transparency in transition in Latin America and the Caribbean
Opportunities and challenges of the energy transition.
In 2020, the renewable energy sector accounted for 26% of foreign direct investment project announcements in the region, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). Twelve countries recently pledged to base 70% of their energy mix on renewables by 2030. Most of the region’s nationally determined contributions (NDCs) under the Paris Agreement include a 20-30% reduction of emissions by 2030.
The energy transition brings new opportunities for development and new challenges. The transition in LAC can attract investments and generate new jobs; the Inter-American Development Bank and International Labour Organization forecast that the energy transition can create 15 million jobs by 2030. But the transition will also impact government revenues in countries dependent on fossil fuels and risks leaving massive resources stranded.
EITI disclosures and data can help understand these opportunities and challenges better and inform actions that can lead countries towards a sustainable transition. EITI information can generate an inclusive debate where communities and minorities discuss the economic, social and environmental implications of the energy transition with companies and governments. EITI data can also help governments and communities anticipate and plan for these impacts, for example by prioritising investments in particular regions or sectors, or by designing targeted policies to base a just transition.
With demand for fossil fuels predicted to peak in the coming decade, government finances could take a hit in countries where these commodities represent an important share in government revenues, exports and jobs. In Guyana, which began oil production last year following several large discoveries, expectations for oil revenues are high. The Dominican Republic’s 2017-2018 EITI Report outlines the first international tender process for oil exploration and extraction, with a contract signed in 2020. Countries in the region face a shrinking time window to take advantage of their hydrocarbon reserves, and a growing need for fiscal diversification. A recent IDB study forecasts that more than two thirds of possible reserves in the region could end up becoming stranded by 2035.
Colombia’s 2019 EITI Report shows that although oil extraction represents around 3% of GDP and coal only 1%, regional and local governments are entitled to a significant share of royalty transfers from extractives. A recent law gives local governments more autonomy to manage royalty resources (USD 4.2 million). Phasing out fossil fuel projects could therefore have a significant and long-lasting impact on revenues for communities who depend on the sector for income and employment.
The energy transition can also attract more investment and diversify government incomes. Carbon taxes are a good example. Three EITI countries in the region – Argentina, Colombia and Mexico – have levied them for some years, but only Colombia publishes them in its EITI Report. Colombia and Mexico have seen a decline in these contributions for the last couple of years, while in Argentina they have been growing steadily since 2018. Reporting this information can inform debates on future needs to finance the energy transition, keep track of government incomes and shed light on progress towards carbon-free goals.
Latin America and the Caribbean is home to important reserves of critical minerals such as lithium, nickel, cobalt, copper and gold. The foreseeable increase in demand will trigger discussions on the appropriate level of tax and royalties levied by the government and the governance mechanisms to exploit them. Several countries are now discussing or implementing policy changes in the governance of these minerals such as revising royalties and nationalising production. Mexico is discussing a draft bill that would reserve the exploitation of lithium and other “strategic minerals” to the state. Mining laws across several countries in the region need to be updated, and the EITI can be a natural forum for peer-to-peer learning and for implementation of best practices.
The EITI can also help tackle issues that threaten the energy transition in the region. According to a survey by the Latin American Energy Organisation (OLADE), corruption was identified as a likely barrier to the energy transition in the continent. EITI reporting can shed light on potential risks and challenges in the renewable energy industry – including on contracting, beneficial ownership of companies, revenues and social and environmental impact.
Environmental and social challenges
The shift to cleaner sources of energy will see the development of new mining projects, the cancellation of other mining activities (such as coal production), a decrease in oil production and an increase in demand for gas. EITI reporting on environmental management and monitoring of extractive activities, as well as social and environmental expenditures, can support public debate on these issues in line with the Escazú Agreement, an environmental treaty signed by 24 governments in the region which guarantees access to information, public participation and justice on environmental matters. The most recent discussion in Debates EITI stressed that a just transition requires a well-informed citizenry on energy transition policies and consequences.
The EITI could also be a platform for dialogue to inform decisions relating to climate targets. As a part of its efforts to increase public awareness around climate change and energy transition, Trinidad and Tobago EITI (TTEITI) established an environmental subcommittee to oversee work on environmental reporting by companies, including on electricity, water usage, CO2 and methane. The subcommittee aims to incorporate environmental and climate considerations in the management of the sector, including a natural capital approach, in conjunction with the Central Bank of Trinidad and Tobago and other agencies.
A just transition must be a transparent one
Orderly but steady progress towards the energy transition can be a sound pathway towards economic recovery in the region, which is still grappling with the impacts of COVID-19. The extractive sector will play a key role in the transition to net zero, but transparency is critical to avoid past governance mistakes and ensure efficient markets. As the transition accelerates, the EITI can be a vehicle for accountability in countries’ efforts to meet climate commitments.